3 keys to profitable parts management

By Bob Clements

During the past 60 days, the season has heated up and business is booming in dealerships across North America. Wholegood sales are up substantially and parts and service seem to be strong again this year. In recent articles, I have focused on changing various elements of a dealership to help them maximize profit during the busy season. In this article, I will shift my attention to the parts department.

If you have read my articles in OPE during the past few years, you know that I preach “process” to my dealers. Everything in your dealership should have a process outlined so that you can tweak and adjust what you are doing, giving you the ability to reduce the time it takes to sell, deliver, or service equipment.

As a result of developing processes, you can create measurements that allow you to do a better job of managing and “troubleshooting” each department when you think something is not quite right.

If you were to go back to your shop and ask any service technician to “troubleshoot” a mower engine that will turn over but not start, that tech is going to immediately check three things: fuel, spark and compression. First, the tech would make sure that it has fuel and that the fuel would actually burn if it comes in contact with a spark. If the fuel is good, then the tech would take a spark tester and confirm that there is indeed “fire” going to the plug. If it has fuel and sparks, the tech would check the compression to see if there is enough to create an explosion inside the cylinder to move the piston.

The three-step process is pretty simple — Fuel, Spark, Compression.

Those three simple elements brought together in the proper sequence is the difference between an engine that runs and one that doesn’t.

Just as a technician has three keys that must all be in place to make an engine run, a parts department must understand the three key elements that make it run efficiently and profitably. They are as follows:

Inventory Turns/Days On-hand
Percent of Fill
Operating Profit

Once you know the numbers for each of these measurements for your parts department, you have the ability to access its health and to make adjustments that will improve how it operates with the other departments of your dealership.

Are these the only three measurements? No. Just as there are more than three things that make an engine run smoothly, there are more than three elements you need to measure in your parts department. But, if you don’t know the three key elements – nothing else matters.

Business Management Systems

Good measurements in the parts department start with good information coming from your business management system. If you don’t have a business management system, you should consider investing in one when your season begins to slow down (see sidebar at end of this article). A business management system will allow you access to good information that will assist you in managing all aspects of your dealership. There are many factors to consider when purchasing a business management system, but know that once you have made the up-front investment, any additional cost will most likely be for price updates and maintenance, which you will want to keep as low as possible.

With whatever system you use, you will want to gather your data so you can begin to evaluate the effectiveness of your parts department. One of the first measurements to look at is Inventory Turns/Days On-hand.

Inventory Turns/Days On-hand

Most, if not all, parts managers understand the importance of measuring their parts inventory turns – which theoretically helps them determine if they are doing a good or bad job controlling their department. I warn dealers that they need to understand the difference between “gross” inventory turns and “true” inventory turns. To determine your “gross” turns, take the annualized cost of your parts sales and divide that number by your total dollars of parts inventory. Your goal is to have a “gross” turn 4-6 times per year. With a turn of less than 4, you may be carrying too much inventory, and with more than 6, you are probably ordering too often and missing out on volume purchase discounts.

The problem with just looking at your “gross” inventory turn is that it doesn’t tell you how much of your inventory you are actually selling from what you actually have on site at your store.

By looking at your “true” inventory turns, you get a more accurate picture of how your parts sales are moving through your on-hand inventory.

To calculate your “true” inventory turns, take the annualized cost of your parts, subtract any special or emergency orders, and divide by your parts inventory. For example, if your cost of parts was $300,000, your special orders and emergency orders were $30,000 and your parts inventory was $60,000, your formula would be as follows: $300,000-$30,000=$270,000/$60,000=4.5 turns per year. Our goal for dealers is 4-5 turns per year.

Once you have determined your “true” turn number, we encourage our dealers to determine their “Inventory Days On-hand.” To determine Inventory Days, divide your inventory turns into 365 days. For example, if your “true” turn is 4.5, you would have enough inventory on-hand to cover your needs for 81 days. The formula is simply 365/4.5=81 days.

The reason we like for parts managers to measure their inventory in terms of days instead of turns is because it gives you a more accurate picture of what is really going on. The difference between 4.5 turns compared to 5 turns doesn’t seem significant, but by turning those into days, it is the difference between 81 days and 73 days of inventory on-hand.

Percent of Fill

How good are you as a parts department taking care of your two best customers — the “one” at the counter and the “ones” in your service department? Well, if you want to know, the next area to focus on is your “Percent of Fill.”

A critical measurement of a parts department is to determine how often a customer or a service department has a need for a part. Is your department able to satisfy that demand from your inventory on-hand? Your “Percent of Fill” will tell you not only if you have enough parts on-hand, but also if they are the right parts. When looking at your parts department, it’s important to keep in mind that it exists to have parts when they are needed.

From a customer’s point of view, your parts department is there to trade a new part for a broken one. If your customers need a part for equipment your dealership sold them and it is a “wear” part, they are not out of bounds in expecting that you should have those parts. The same holds true for your service department.

When you don’t have the parts that the service department needs to complete a repair, it creates a delay for a customer who was made a promise by the service manager to get a repair done in a certain amount of time. With no part, the service technician has to take the equipment that was being worked on out of the shop, the service manager has to reschedule the work, and a customer has to be called and told the equipment won’t be ready when promised. There are a lot of things that cost the service department money when parts are not available.

What should your “Percent of Fill” be? We like to see it in the mid- to high-80-percent range, although a lot of variables have to be taken into account to really determine a reasonable expectation for you.

For example, how many different lines do you represent? Where do they distribute their parts from in relationship to your dealership? How complex are the lines that you handle? And what type of customer mix do you have?

To determine your parts department’s “Percent of Fill,” take the cost of parts sales, subtract emergency purchases and customer orders, then divide that by the cost of sales plus lost sales.

Once you have determined your “Percent of Fill,” you will know if you have the right parts on-hand when they are needed to meet the needs of both your service department and retail customers.

Operational Profit

Making money is the name of the game in a dealership, and more profit is always better than less profit. Therefore, it is important to measure how much you are actually making. To determine your “Operational Profit,” you have to determine all the money that you bring in through the sales of your parts and subtract your controllable expenses. I say it this way because I don’t normally include administrative costs in this number because most parts managers don’t really have any control over the amount of administrative expense that is charged to their department.

So what should your “Operational Profit” be? This is a little harder to determine because every dealership we work with has different variables that have to be considered such as:

Are you discounting parts to the service department?
Do you have a parts service support person that is expensed out to the service department or to your parts department?
Are your building expenses allocated out by the square foot of space used or as an equal percent between all departments?
What percent of marketing is charged off to the parts department?

In most cases, we like to see an “Operating Profit” of 15 to 21 percent. The 6-percent range is a little wide, but because of the differences in how dealers allocate administrative costs to each department, it’s hard to do more than give you a general guide to follow.

To determine your “Operating Profit,” take your cost of goods sold, your sales and management expenses and all other expenses (except administrative cost), and subtract that number from your parts sales. Then, divide that result by your part sales and you will get your “Operating Profit” percentage.

Checking your “Operational Profit” on a regular basis will allow you to see how much money you are making, so you can make the necessary changes to improve your profit.

With these three measurements, you will have a good handle on your parts department and a real sense of how it is operating. Other parts department items you should monitor and manage include:

Percent of dead stock
Percent of slow-moving stock
Gross profit margin
Average sales per employee
Percent of freight recovery
Lost sales
Average invoice amount

Keeping an eye on these measurements will increase your ability to operate a profitable parts department and should definitely be a regular part of what you measure. But if your “Inventory Turns/Days On-hand” is right, your “Percent of Fill” is in the mid- to high-80-percent range and your “Operating Profit” is healthy, you will have a strong parts department that will be highly profitable and keep your customers and service department satisfied.

 Bob Clements is the president of Bob Clements International, Inc., a consulting firm that specializes in the development of high-performance dealerships. His organization works hands on with dealerships throughout North America, helping them attain the personal freedom and financial wealth all owners strive to achieve. For more information, contact Bob Clements at (800) 480-0737 or bob@bobclements.com or visit his Web site at www.bobclements.com.





Business Management Systems
(listed in alphabetical order by company name)

 BASIC Software Systems
When it comes to managing parts inventory, there is no “one-size-fits-all” strategy for OPE dealerships. That’s why BASIC Software Systems has teamed up with hundreds of manufacturers across the country to provide the most up-to-date pricing for parts and equipment. BASIC also integrates with numerous manufacturers in providing seamless interfaces that help improve parts availability, increase inventory productivity, and allow the parts manager to perform other necessary functions. In addition to a powerful Parts Inventory management tool, BASIC’s entire system provides departmentalized management capabilities that ease the day-to-day processing. For more information on this powerful system solution, call the toll-free phone number below or send e-mail to sales@basic-software.com.
BASIC Software Systems/(800) 252-4476

 Infinity by c-Systems Software
Infinity by c-Systems Software has dozens of easy-to-use features that help dealers make their parts departments more efficient. With calculated stocking orders, seasonal ordering and extensive inventory management reports, dealers can see what amount of parts they have historically sold during different times of the year and lessen extraneous inventory. Infinity also helps maximize the value of every part on your shelf by flagging unused inventory still eligible for return and identifying dead stock.
Infinity’s user-defined tabs make it easy to keep track of parts on back order and parts needed to replenish stock. With the Customer Connect feature, dealers with Web sites can allow customers to securely log on to their business system and review account information — like balances, sales orders and repair histories — or check the status of repairs and back orders. Overall, Infinity’s ease of use and flexibility allow users to fit the system to their needs.
c-Systems Software, Inc./(800) 334-3114

 ASPEN by Charter Software
Windows based, user friendly. ASPEN integrates with Microsoft applications and has the familiar look and feel of Microsoft programs. Accessing functions is similar to opening folders in Microsoft Outlook, and frequently used functions can be labeled as “Favorites” for instant access. Move quickly between tasks using forward and back buttons, as well as manage multiple invoices, functions and reports without losing your work.
Low initial investment for OPE dealers. As your dealership grows, additional locations can be added to the system in less than a minute.
Experienced implementation specialists have converted data from more than 60 types of systems. Charter Software has converted more dealers from QuickBooks than from any other system.
Ongoing support and training. Charter Software offers complete and professional support from configuration, data conversion, onsite training, phone support and free Webinars.
Manufacturer interfaces. Transfer pick lists into ASPEN invoices and/or parts and work orders from PartSmart and PartsManager Pro. Many additional manufacturer interfaces are available.
Charter Software Inc./(303) 932-6875

 Ideal 7.0 by Ideal Computer Systems
Ideal 7.0
provides the latest in cutting-edge technology that will help you gain full control of your inventory management. Equipped with automatic parts and price list loading, seasonal min and max stocking levels, parts-imaging interfaces, and reporting options that indicate your top sellers, worst sellers, and inventory valuation, you will automatically gain an advantage in reducing money tied up in excess parts, and work toward boosting your turns.
With 25 years of experience in offering excellent training, support and consulting, Ideal has helped thousands of OPE dealers achieve maximum results. Ideal’s software development is influenced by dealers, just like you, and is an invaluable tool that will improve efficiency and boost profits in all areas of your business.
To see how the new Ideal 7.0 — now equipped with appointment scheduling, the ability to view key performance indicators on a mobile device, and fully integrated Finance and Insurance — can benefit your business, request a free info pack and demo CD by calling the phone number below or visiting www.idealkit.com/4321.
Ideal Computer Systems, Inc./(800) 737-1620

 Pathfinder’s Mekanix Choice
Pathfinder’s newest version of business management software for outdoor power equipment dealers is Mekanix Choice. It is powered by the .NET environment with the power of an SQL database and the added power of user suggestions. Mekanix Choice includes inventory management, customer invoicing, work order/repair, accounts receivable, QuickBooks interface, data server and price files for up to 20 manufacturers. The package includes data server with 3-year hot swap warranty, automatic software updates, unattended daily offsite data backups, and unattended price file installations with effective-date notifications. Several options are available.
“With our previous software, if we ran into a hardware failure, we lost all our customer, transaction and inventory data,” said Mike Saice, national parts and service trainer, Northern Tool and Equipment. “With Mekanix Choice, all that information is backed up outside of our PCs. It has saved three or four locations already. Mike Waterson, Jeremie Grund and the support staff at Pathfinder solve problems and issues very fast! Great support!”
Pathfinder Computer Systems, Inc./(330) 928-1961

 InvenTrakk by Paulson Computer Systems
InvenTrakk by Paulson Computer Systems comes with an advanced inventory control module for outdoor power equipment dealers. InvenTrakk will import price books for all of your manufacturers to ensure that you have the latest part numbers, cost information and supersede data for all of your parts. The system supports 10 different levels of pricing markup, allowing you to control different profit margins on items in different price ranges. It also offers advanced inventory reporting, including a daily detailed profit margin analysis report that allows you to view the profit on everything that went out the door for the day. In addition, the latest InvenTrakk ships with free CODIS Electronic ordering, which allows you to order parts instantly and electronically. InvenTrakk is completely free for 30 days. Test drive it in your dealership today by visiting www.inventrakk.com/testdrive.aspx.
Paulson Computer Systems/(800) 659-8547

 Lizzy 2.0 by SofTek Software/nizeX Inc.
In 2009, SofTek Software teamed up with nizeX and developed the first fully functional, Web-based intelligent business system specifically designed for the Power Equipment and PowerSports industries.
In 2010, SofTek Software and nizeX have set the stage for the next evolutionary steps toward intelligent business solutions with the introduction of Lizzy 2.0.
Lizzy is a complete Dealer Management System, including Customer Relationship Management, Accounting, Budgeting, Invoicing, Inventory Control, Payroll, Financing, Web Store/e-Commerce integration, Text/SMS Messaging Notifications, WebPhone/PDA Capabilities, Multi-Store and much more.
The Internet has become an integral resource to most businesses; therefore, Lizzy has been designed to run through a Web browser across the Internet. This allows you to focus on the utilization of her services, instead of the setup and maintenance of hardware and software throughout your business. Lizzy requires no software to install, no special configurations to set up, and does not require a specific operating system.
SofTek Software International/nizeX Inc./(678) 359-4187

Parts Look-up Software

 PartSmart from ARI
PartSmart from ARI (OTCBB:ARIS) is parts lookup software providing the fastest way to find the right part the first time. Its user interface offers more information — across multiple manufacturers — with fewer keystrokes and mouse clicks than competing packages. PartSmart is compatible with dozens of catalog databases and interfaces with 90-plus dealer Business Management Systems. With PartSmart, users can view part assembly and know what parts are in stock and their cost. Users can customize their views, create pick lists, and immediately access notes and bulletins.
Other dealer management tools available from ARI include WebsiteSmart Pro, which allows dealers to connect with their customers 24/7, and FootSteps Lead Management program, which helps dealers turn qualified leads into immediate sales.
ARI/(800) 755-6040


Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Check Also